Drinkwater v Nadinic

Supreme Court of NSW|2016-09-21|Before: Pembroke J

Solicitors: Hewitts Commercial Lawyers - for the plaintiff Summer Lawyers Pty Ltd - for the defendant` File Number(s): 2016/242022

Introduction

This claim came before me urgently in the Duty List a few weeks ago. There was no pleading but the core of the plaintiff's complaint is that she was induced to enter into a deed of settlement, and to give a related second mortgage to the defendant, by reason of his non-disclosure of certain material facts. The defendant's failure to disclose is said to have been misleading and deceptive, in the statutory sense as well as in the sense that it constituted equitable fraud.
The plaintiff's legal submissions ranged rather wider than her statement of issues and her amended summons but it was always clear that the primary issue was whether the plaintiff is entitled to set aside the deed and the mortgage, wholly or in part. In effect, she invokes the equitable remedies known as rescission (the deed) and delivery up and cancellation (the mortgage). She sought, perhaps at a minimum, to vary the mortgage by reducing the amount of her debt to the defendant.
Unfortunately, there was no consideration of how or whether rescission could be achieved equitably, having regard to the payments already made and the conduct that has already occurred. The deed of settlement was entered into on 24 November 2015 and much has happened in performance of its terms. If the plaintiff is notionally entitled to rescission, it will be necessary to mould a remedy so as to achieve practical justice between the parties.

Failure to Disclose

The allegation of failure to disclose has two components. The first concerns an alleged failure to disclose 'the extent of the works and costs to complete' of the building project known as 'Wharf Developments' in which the plaintiff and the defendant were involved pursuant to a joint venture agreement. The second concerns the fact that, unknown to the plaintiff, the sum of $923,589 representing GST input tax credit refunds to which a company called Brooks Parade Pty Ltd (Brooks) was entitled, was paid to Maxstra Constructions Pty Ltd (Maxstra Constructions). The first issue must inevitably fail having regard to the detailed negotiations between the parties and the fact that the plaintiff received considerable professional advice and assistance. The second issue is more troubling.

Joint Venture Agreement

The contractual context in which these issues arise, includes the joint venture agreement and the deed of settlement. The joint venture agreement was entered into in 2011. The parties to it were the plaintiff as landowner and Brooks as developer. At that stage, Brooks was owned and controlled by the defendant. The agreement stipulated, somewhat optimistically, that the net proceeds of sale of completed lots in the development should be paid first, in discharge of the construction loan; second, as to $430,000 to Brooks; third, as to $1.57 million to the plaintiff; fourth, as to $2 million in equal shares to the plaintiff and Brooks; fifth, in reimbursement to the venturers to the extent they had not been previously reimbursed; and sixth, as to any balance to Brooks.
It all ended in tears. From at least July to November 2015, extended negotiations took place between the parties to bring to an end their contractual relationship pursuant to the joint venture agreement. Those negotiations, in which solicitors representing both parties were deeply involved, culminated in the deed of settlement entered into on 24 November 2015.

Deed of Settlement

The deed of settlement represented a finalisation of the disputes that had arisen in connection with the development project. The parties to the deed of settlement are the plaintiff, the defendant, Brooks and Maxstra NSW Pty Ltd (Maxstra NSW). Maxstra NSW, as well as Maxstra Constructions, appears to have been effectively controlled by the defendant or his father or both of them, at all material times. Maxstra NSW was the builder. It entered into a construction contract for the project with Brooks in 2013. At about that time, the plaintiff became an equal shareholder and director of Brooks. The deed of settlement provided, among other things, for the termination of the building contract and for the resignation of the defendant as a director of Brooks. It also provided for the transfer of his one share in the company to the plaintiff. The defendant was being paid out and was handing over the project to the plaintiff. Among other things, the plaintiff, the defendant and Brooks agreed to release each other from any claims arising out of the project or the joint venture agreement. Significantly, the plaintiff agreed to grant a registered second mortgage over the land in favour of the defendant to secure the payment by her to him of the sum of $2,050,000.
The terms on which the plaintiff and the defendant agreed to settle their differences were extensively discussed and negotiated over many months and were ultimately embodied in the deed of settlement and mortgage. The mortgage provided that the sum of $2,050,000 was payable to the defendant either on the sale of the property, or the death or total or permanent incapacity of the defendant, or on 30 June 2016, whichever occurred first. As of today, the defendant is alive and well; the property has not yet been entirely sold; and 30 June has come and gone without the plaintiff paying to the defendant the amount due to him. The defendant took steps to exercise his power of sale by reason of the plaintiff's default. In response, the plaintiff commenced this proceeding on 11 August seeking to restrain the defendant. She has not offered to pay the amount due into court, although the defendant took no point about her failure to do so.

The Negotiations

The settlement negotiations were painstaking. Throughout the process, the plaintiff was assisted or represented by her husband, Peter Drinkwater, and her solicitor, Mr Hewitt. On 8 November 2015, as the negotiations were reaching their drawn out conclusion, the plaintiff's husband wrote to the defendant and stated - aptly, accurately and sensibly - 'the main difference is the cost to complete, which we could disagree on forever'. This remark effectively recognized the inevitable risk to the plaintiff in taking over the project. No matter how much the parties reviewed, discussed and argued about the figures, the plaintiff could not be certain of the cost to complete. That is in the nature of a partly completed building project. She had to take a chance.
The agreed figure of $2,050,000 was the product of give and take on both sides. Its origins derived from two principal matters. First, the defendant had contributed more than the plaintiff to the project. Second, the ANZ Bank facility of $6.35 million was insufficient to complete the project having regard to the estimated variations and the estimated cost to complete. During November, these figures, including the estimated cost to complete, received detailed consideration.
As at 30 October 2015, the ANZ Bank calculated that a further $1.138 million was required in addition to the remaining balance of $593,000 available under its facility. The defendant contended that he had already caused Brooks to contribute $1.5 million while the plaintiff had only contributed $550,000. On 8 November, the plaintiff and her husband offered $1.31 million to the defendant. The offer was accompanied by handwritten calculations by Mr Drinkwater that were predicated on the defendant's estimate of the cost to complete of $1.2 million. The defendant responded 'after reviewing your numbers and making corrections'. He said the true balance to which he was entitled was $2.332 million. He also assumed an estimated cost to complete of $1.1 million.
The defendant suggested that his figures and his analysis represented the 'only workable solution'. He added that the matter needed to be resolved by 9 November because Brooks would be in default on 10 November. Mr Drinkwater's reply on behalf of the plaintiff included the already-mentioned remark about 'the main difference [being] the cost to complete, which we could disagree on forever'. On 9 November, he made an increased counter-offer on behalf of the plaintiff of $1.65 million but added - 'We can argue over CTC and the defect list which is growing and I think you would be shocked at the extent of the defects'.
The amount that the plaintiff was prepared to pay continued to increase. By 13 November, a draft mortgage had been prepared providing for payment of the sum of $2,075 million by the plaintiff. Further correspondence and negotiations ensued. On 18 November, the defendant's solicitor complained that 'the original amount was reduced to $2.1 million and now your clients want a further $75k'. On 19 November, the plaintiff and her husband appeared to reach breaking point. The plaintiff sent a text to the defendant at 5.30 am that said 'All we want is never to revisit this again - we are over the whole thing'. The ANZ Bank was made aware of the situation. It was considering the appointment of a receiver and informed the parties that it required 'a solution acceptable to the Bank (and executed) … by 5 pm tomorrow'.
The parties continued to negotiate for a few more days - through their solicitors - over the amount to be paid by the plaintiff to the defendant. On 23 November, the plaintiff's solicitor stated that 'the amount should remain $2,025,000'. On 24 November, the defendant's solicitor responded with $2.050 million. He implored the plaintiff's solicitor 'Please ask your client to reconsider her position so that we can conclude this agreement today'. She apparently did so; the deed of settlement was executed; the final figure was $2.050 million.

Compromise, Waiver & Reliance

The plaintiff gave evidence but her husband remained silent, even though he appears to have been substantially more involved than she was in the negotiations and in reviewing the figures. And he was in court throughout the hearing. The plaintiff's evidence on the cost to complete issue was unconvincing. She now says that the actual costs to complete are $2,137,761 and that much of this sum is attributable to cost overruns that were not disclosed by the defendant. In particular, she complained that unanticipated additional costs and time delays were incurred in rectifying window defects and obtaining valid occupation certificates.
There were certainly problems with some of the windows and not as much of the project was as ready for certification as had been believed by all concerned - including, in my view, the defendant. This also applied to the independent assessor, Martin Langen of Profile Project Management Pty Ltd. His company was appointed in October 2015 to the position of superintendent of the project - apparently at the insistence of ANZ Bank. Mr Langen undertook a cost to complete exercise and estimated that the likely figure was $1.357 million, compared to the defendant's estimate of $1.1 million.
The point is that these were estimates, not warranties. No one could know for certain what the final figure was going to be. And the defendant was not deliberately holding back information known only to him. Admittedly he adopted an optimistic approach but on this issue he was not dishonest. He could not have known that in February 2016, the principal certifying authority would reject a number of occupation certificates for windows. There was no failure to disclose on this issue. And I am satisfied that, for their part, the plaintiff and her husband well understood the inherently elastic nature of the 'cost to complete' component of the figures on which the plaintiff's agreement to pay $2,050,000 to the defendant was based. She was content to adopt Mr Langen's figure; she relied on him, not the defendant; she did not wish to take the time and trouble to investigate further; she was anxious to resolve the negotiations; and she knew that the ANZ Bank was threatening to appoint a receiver. As I have said, the plaintiff and her husband took a chance.
The law loves a compromise. That is what has occurred here. The plaintiff chose to rely on Mr Langen. There was no reliance by the plaintiff on the defendant's estimate of $1.1 million. Nor was there any reliance on any supposed duty of disclosure by the defendant on this issue. In any event, as I have concluded, the defendant did not deliberately withhold information. Among other things I am satisfied that he believed in November that 75% of the project was ready for final certification. The fact that he was wrong and that the actual costs to complete turned out to be more than the plaintiff expected are not grounds justifying her refusal to perform her obligations pursuant to the deed of settlement and mortgage.

GST Input Tax Credits

The plaintiff's other complaint relates to a sum of $923,589 in GST refunds received by Brooks for the period June 2014 to December 2015. She only became aware of this receipt after the deed of settlement, when she took over Brooks and her solicitor's brother became the company's accountant. The defendant's counsel skillfully put the best possible light on this aspect of the case but the discovery of this receipt - and its payment to Maxstra Constructions - was understandably disturbing to the plaintiff.
The defendant clearly owed fiduciary obligations to the plaintiff. To all intents and purposes, the plaintiff and the defendant were the joint venturers: the defendant was in effective practical control of Brooks until he resigned as a director following entry into the deed of settlement; and until that time, the plaintiff did not have access to Brooks' books and records. And as I have already observed, Maxstra NSW and Maxstra Constructions were companies relevantly owned and controlled by the defendant or his father or both of them. The two companies had common shareholders and directors. As the defendant said, they were both under 'the Maxstra brand'.
The evidence revealed that Brooks (when controlled by the defendant), Maxstra NSW and Maxstra Constructions were involved in a scheme to manipulate the GST system for the ultimate advantage of Maxstra Constructions which, as I have mentioned, was not the builder. The submissions did not address the lawfulness of this scheme but there were troubling aspects about it. Both Maxstra NSW and Maxstra Constructions are now in liquidation.
Unknown to the plaintiff, Maxstra NSW issued invoices totaling $10,366,698 to Brooks in respect of the project. There was no conceivable justification for this. The value of the project was only approximately $6.5 million. The ANZ facility amount was $6.35 million and for the period from June 2014 to March 2016, drawdowns from the ANZ Bank totalled $6.1 million. The building contract price was $6.398 million. And this project was the only business of Brooks. It was not possible for Brooks to pay, and not possible for Maxstra NSW to justify issuing, invoices totalling $10,366,698.
I am afraid to say that this was not merely creative accounting. It was behavior that bears the hallmark of naked dishonesty. Its apparent purpose was to generate an entitlement in Brooks to receive GST refunds. In one sense, given the correlative liability that accompanies a GST refund, this might not have mattered to the plaintiff - except for the fact that, when the GST refunds were received, they were not remitted to Brooks. The defendant directed PKF, the accounting firm then acting for Brooks, to transfer the monies to Maxstra Constructions. The defendant sought in vain to attribute responsibility for this instruction to his father but it is far more likely that he was the one who gave the direction to PKF, as he controlled Brooks, not his father. The defendant's answers to questions on this issue were equivocal and evasive. Not surprisingly, in the circumstances, the defendant did not inform the plaintiff of the direction to transfer the monies to Maxstra Constructions - although she had been his fellow director of Brooks since 2013.
The partner of PKF who acted as Brooks' former accountant, provided a letter stating: Brooks Parade Pty Ltd accounts for GST on an accruals basis method. GST input tax credit refunds from Business Activity Statements arising during the following period were deposited into our firm's trust account in accordance with our client's instructions: 1 April 2014 to 30 June 2014 1 July 2014 to 30 September 2014 1 October 2014 to 31 December 2014 1 January 2015 to 31 March 2015 1 April 2015 to 30 June 2015 1 July 2015 to 30 September 2015 Under further instructions from a Director of Brooks Parade Pty Ltd, these monies were transferred to accounts held in the name of Maxstra.
The accountant did not give evidence but I was not impressed with his obvious coyness in not stating directly that the 'Director of Brooks Parade Pty Ltd' who gave the instructions was the defendant or that the 'accounts held in the name of Maxstra' belonged to Maxstra Constructions - which was not the builder and had nothing to do with the project. These were matters known to the accountant, who clearly preferred deliberate opacity when specificity and transparency were naturally called for. In any event, no harm was done as the true facts emerged in the evidence.
A total of $923,589 was transferred to Maxstra Constructions. That sum represented GST input tax credit refunds to which Brooks had become entitled after lodging business activity statements that were ostensibly predicated on the receipt from Maxstra NSW of invoices totalling $10,366,698. As I have indicated, the invoices must have been inflated or fabricated. And the defendant must have known it. He must have known that they contained false representations that were intended to induce the Australian Taxation Office to pay to Brooks a substantial sum representing GST input tax credit refunds.
The response of the defendant's counsel to these stark facts was unpalatable and unconvincing. He said that, properly characterised, the facts gave rise to a claim by Brooks 'either under a derivative suit under s 237 of the Corporations Act or a claim by Mrs Drinkwater as a director of Brooks either under the same derivative section or as a claim for breach of director's duties under ss 180 and the following of the Corporations Act'. He added that this was not a case about the accuracy of the GST claimed. Rather, he said, such a case was one that 'the ATO can bring if it was not satisfied with the lodgments that had been reported'. He emphasized that the payment of $923,589 was 'a payment of money from the ATO in respect of a liability which Brooks reported to the ATO'; that 'whenever it comes to GST, there is always a correlative liability'; and that one should not look at the $923,589 'as a windfall amount that suddenly comes back into the coffers and is available for … a trip to the Bahamas'.
The defendant's submissions concluded with the proposition that 'even if Ms Drinkwater had been aware of those matters, then absent a derivative suit or some other type of suit on behalf of Brooks to try and do something about that reporting or payment of GST, it simply has nothing to do with the suit before your Honour now. Ms Drinkwater's trust is not the taxpayer for the purposes of the GST issue'.
For the reasons that follow, I do not think the defendant's submissions are an answer to the plaintiff's claim that there was a failure to disclose that amounts to equitable fraud and entitles her to appropriate relief in respect of the deed of settlement and the mortgage. The plaintiff gave unchallenged evidence that: If I had known that Maxstra [Constructions] had received GST refunds of $923,589.00 that Brooks was entitled to from the ATO, before I signed the Deed of Settlement, I would not have agreed to pay to the Defendant the sum of $2,050,000.00 to be secured by a second mortgage over the Land.
I accept that evidence. It is understandable and reasonable in the circumstances. The plaintiff may have been anxious to finalise the negotiations but she did not expect perfidy and crookedness. She could not have anticipated that an apparently dishonest scheme had been created involving Brooks and both Maxstra companies; a scheme that appears to have perpetrated a fraud on the Australian Taxation Office. The defendant's concealment from the plaintiff of his knowledge and involvement in the scheme was a deliberate choice made by him. It was the product of the conflict between his duty to the plaintiff and his interest in the payment of the GST refunds to Maxstra Constructions.
The matter clearly required investigation. If revealed to the plaintiff, let alone to her husband and her solicitor, the complexion of the negotiations would have changed. The outcome would probably have been different. The stench of dishonesty would have corroded the plaintiff's trust in the defendant. Fraud, as Lord Denning, once said, 'unravels everything … it vitiates judgments, contracts and all transactions whatsoever': Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712.
The following observations concerning the effect and consequence of non-disclosure are as apt today as they were when first uttered: When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, it cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constitutent, on disclosure, would have taken is not relevant.
See Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 by Lord Thankerton; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [435]-[439]

Remedies

I have reached the view that the plaintiff is entitled to succeed in a claim for equitable relief. However, she has no statutory claim. She is not a 'consumer' for the purpose of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth) Sch 2) and the Contracts Review Act 1980 (NSW) has no possible application in her circumstances. She was capably represented by her solicitor during addresses but she has not otherwise been well served. As I said, there was no consideration of the effect of the payments already made or the conduct that has already occurred pursuant to the deed of settlement. Appropriate equitable relief necessitates practical justice between the parties. There will need to be further consideration of the appropriate remedy.
The best outcome would be if the parties were able to give consideration to these matters with a view to agreeing on appropriate amendments to the deed of settlement and the mortgage that reflect my findings. The plaintiff will be entitled to recover her costs from the defendant. I will consider the desirability of bringing my judgment to the attention of the relevant law enforcement authorities for their review. If there has been a fraud on the Commonwealth involving the defendant, it is a serious matter.

Orders

The only orders I make at this stage are as follows: 1. Stand over the proceedings before me on Friday, 21 October 2016 at 9.45 am for directions. 2. Order that the defendant be restrained up to and including 21 October 2016 from taking any steps to enforce the deed of settlement dated 24 November 2015 or from exercising the powers given to him as mortgagee pursuant to the mortgage dated 24 November 2015 between the plaintiff as mortgagor and the defendant as mortgagee. 3. Direct that, if necessary, prior to 21 October, the parties should approach the Duty Judge, for any such interlocutory relief as may possibly be required in connection with the ongoing sale of units or otherwise in connection with the building project. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 September 2016

Australian Consumer Law (Competition and Consumer Act 2010(Cth)

Australian Consumer Law (Competition and Consumer Act 2010 (Cth) Sch 2) Contracts Review Act 1980(NSW)

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